Mining News

The End of the Commodity ‘Super Cycle’: root causes and consequences for miners

Posted by Alana Wilson on 5/21/2013 12:21:03 PM

By John L. Dobra i

Financial analysts have been proclaiming the end of the so called commodity super cycle for some months now and mining companies are starting to feel the pinch of lower commodity demand and prices. The demand and price weakness is being felt in markets for most mineral commodities – iron, copper, coal, and precious metals – and it is starting to squeeze miners. Large precious metals producers’ like Barrick Gold, Newmont Mining and AngloGold Ashanti stock prices have been sinking under the weight of higher production costs and lower prices. Base metal and diversified miners like BHP Billiton, Rio Tinto, PLC, and Glencore Xstrata PLC [1] are scaling back investment plans and adopting cost saving measures.

Most analysts are blaming the end of the super cycle on slowing growth in China. CNBC.com’s Matt Clinch post “Commodity Super Cycle Is Dead: Citi” [2] and Arsuya Harjani’s “Has China’s Economy Hit a Dead End?” [3] seem to sum up a widely held consensus. Yet, this consensus is curious in several respects.

First, a decline in the rate of growth in Chinese GDP in the first quarter of 2013 to 7.7 percent from an expected 8.0 percent hardly seems like a “dead end” or a plunge off a cliff. Compared to an anemic 2.0 percent growth rate in the U.S. and worse in most of Europe, 7.7 percent GDP growth is gangbusters. One suspects that the miners’ problems was not so much slower growth in China, but the exuberance of the miners to cash in on the cycle. The miners, to borrow a phrase from farmers, want to “make hay while the sun shines.”

This is not to be confused with “irrational exuberance”, a phrase used by former U.S. Federal Reserve Chairman Alan Greenspan to describe the “dot com” stock bubble of the late 1990’s. Given the cyclical nature of commodity prices, it is entirely rational for miners to pursue the cycle. But given delays in project development, financing, and permitting it’s not easy to make hay before the sun goes down.

But the other curious thing about the consensus is the commodity super cycle itself. Based on conventional economic growth theories, we would expect a country like China with GDP per capita of around $4,400 in 2011 would grow faster than developed countries like the U.S. ($48,100 GDP per capita) and Canada ($50,300) [4]. They have the advantage of using technologies and resources developed in richer nations to get richer quicker. But still, China is a poor country. It is definitely getting wealthier much faster than many other poor countries, but the facts remain. BMW dealerships in Beijing and Shanghai do not make you a wealthy country.

Anecdotal evidence suggests that there are large parts of the Chinese economic miracle that are also hard to believe. Gordon Chang, a frequent contributor to Forbes magazine and other publications has been a notable doubter, and there are others. Chang has tracked Chinese electric production relative to Chinese reports of GDP. The two indicators ought to track each other but Mr. Chang has consistently reported that they don’t. Harjani’s piece cited above notes that in the last quarter when Chinese GDP increased by 7.7 percent, electricity output only increased by 4.3 percent. That seems like a curious statistic since producing virtually anything requires electricity.

There are other anecdotal pieces that raise questions about the Chinese economic engine behind the commodities super cycle. We have heard that China wants to build 20 cities in 20 years and apparently they have been building them with government financed bank financing. Unfortunately, a population earning $4,400 per capita can’t afford to buy what they are building. There are also reports that many of the state financed bank loans to finance the Chinese economic miracle are non-performing. Even former Chinese Prime Minister Wen Jiaboa called the Chinese economic model “unsustainable” as reported by Mr. Harjani.

Maybe miners should have been exercising some more caution. But the rise in commodity prices was real and the miners chased the profits for their shareholders as they should. The root of the instability in markets for minerals seems to have been unsustainable industrial policies pursued by the Chinese government.


iDirector, Natural Resouce Industry Institute and
Associate Professor of Economics
University of Nevada
Senior Fellow, Fraser Institute
Reno, NV 89557-0060

jdobra@unr.edu


Show References

References

[1]WSJ, BHP to Rein In Investment, Chief Says, May 14, 2013, http://online.wsj.com/article/SB10001424127887323716304578482101543700158.html#printMode, (link may require a subscription).
[2] http://www.cnbc.com/id/100641156
[3] http://www.cnbc.com/id/100640805
[4] http://data.worldbank.org/indicator/NY.GDP.PCAP.CD
 




Hide Comments

Comments



Leave a Comment

Name (Required):
 
Email (Required):
URL (Optional):
Your Comments:
 


<< August 2018 >>
Sun Mon Tue Wed Thu Fri Sat
      1 2 3 4
5 6 7 8 9 10 11
12 13 14 15 16 17 18
19 20 21 22 23 24 25
26 27 28 29 30 31  

Categories

Archive